Keys to Growing Net Worth

Here's a piece that discusses the different asset types and how the accumulation of each impacts your net worth. It then offers some advice on how to grow your net worth. But we'll start with some truthful observations the article makes about net worth:

The most harmful illusion is that personal assets — the clothes and jewelry we wear — will contribute to our future security. They won't.

The second most harmful illusion is that household assets can be turned into financial assets.

Then the piece turns to some advice on whether or not your net worth is headed in the right direction:

So what's the fastest way to know if we're doing the right thing with our five kinds of assets? Here are the basic rules:

• If your personal assets are growing faster than your financial assets, your attention is in the wrong place and you're headed for trouble.
• If your household assets are growing faster than your financial assets, you're fortunate to live where you are. But you may be heading for an "end-game" problem — someday you will have to sell your house because that's where all the money will be.
• If your financial assets aren't growing significantly faster than your earned income, you're heading for trouble. Why? Because your financial assets will have to be a large multiple of your earned income if you want to retire.

It ends with this conclusion:

Is there a sign you're doing well? Yes. You're not preoccupied with acquiring or paying for personal assets, your home mortgage is shrinking ahead of schedule, and your financial assets are growing two or three times faster than your income.

My thoughts:

1. I've written a lot about how you need to buy a house you can afford and that moving, even to a foreign country, is a good way to save a bundle. These are options to consider.

2. I wouldn't want a financial situation where the majority of my net worth was tied up in my house. From an investment standpoint, it's not diversified and as such is risky.

3. I've never heard of that rule of thumb given at the end, but I agree with it. Personally, I'm not preoccupied with acquiring or paying for personal assets (I'm rather frugal, as you can probably tell), my home mortgage is paid off, and my financial assets are growing several times faster than my income.

Comments

[Big Mike]

"your financial assets are growing two or three times faster than your income"

I'm not sure exactly what that means. If your net worth from your investments is, year after year, increasing by more than two or three times your annual income from working, maybe it's time to retire from work and focus full time on investing!

[FMF]

"your financial assets are growing two or three times faster than your income"

Example: If your income is increasing 3% per year, your assets (I would say net worth) should be increasing 6% to 9%".

Over the decade, I've seen better than four times increse in my net worth versus my income.